Portfolio.hu commission assesses how hungary fulfilled previous recommendations what is the level of education

After a temporary lull, the hungarian economy grew strongly in 2017, employment reached record-highs, bank lending picked up, the fiscal stance is loosening, the EC summed up the key changes.

Albeit contained at this stage, risks to a balanced growth path may start to emerge. High capacity utilisation suggests that the economy is now moving above potential. Particularly, labour supply may soon reach its limits, adding to the already considerable wage pressure.

Strong growth is set to continue. Real GDP growth is projected to increase by 3.7 % in 2018, but to slow to 3.1 % in 2019 as capacity constraints emerge on the back of a gradually widening positive output gap. H

• some indicators suggest that hungary’s tax rules may be used by multinationals in aggressive tax planning structures.

It is shown by the large capital flows as a share of GDP through special purpose entities, combined with the absence of withholding taxes.Positive output

Hungary’s public expenditure is high relative to its income level. The government expenditure-to-GDP ratio was hovering around 50% of GDP in the last decade, somewhat above the EU average. EU fund absorption has played an increasing role in shaping the level public spending since 2004. However, hungary’s level of public expenditure remained well above its regional peers even after filtering out the effect of EU funds.

The EC believes hungary’s debt trajectory could flatten out in the medium term without further fiscal adjustment. According to the commission’s no-policy-change scenario, the public debt ratio is projected practically to stagnate at somewhat below 70% over 2019-2028.

It also warned that the debt reduction is hindered by an estimated slightly negative primary balance throughout the nine-year period. The closing of the positive output gap (and thus the cyclical fiscal component) contributes to an increasing primary deficit.Level public however, the deterioration of the primary balance is projected to be moderated by declining age-related public expenditure.

By contrast, if the structural balance was gradually improved to the country’s medium-term objective, the debt ratio would fall below 60% by 2028.

Hungary faces a pronounced productivity challenge. Productivity growth has been slow for a decade now compared to peer countries. Although potential growth estimates show some recovery, the challenge is becoming more pressing as labour reserves diminish.

There are wide and persistent productivity differences between export-oriented, mainly foreign-owned companies and smaller domestic firms, with limited positive spill-overs from the high-productivity segment. The propensity of smes to innovate is low and hungary remains a moderate user of digital technologies. Regulatory barriers in services and retail trade and unpredictability of regulation hamper the efficient reallocation of resources.Level public institutional weaknesses and human capital inadequacies also constrain productivity growth.

• important measures were taken regarding public procurement, but there remains scope to further improve transparency and competition in tendering processes.

• while showing improvements, health outcomes lag behind most other EU countries reflecting also the limited effectiveness of healthcare provision.